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...at least in concept.

They are, theoretically, a nice insurance against superannuation for yourself or your relict (1) (in addition to that provided by delayed filing for Social Security).

In practice, however, I wouldn't touch annuities with the proverbial ten-foot pole. A bunch of fine print, exceptions, obscure criteria and various other mumblemumble, coated with verbal promises and smooth talk.

At that point, you're required to surrender a substantial amount of capital to some company you've agreed to absolutely rely on come a time many years in the future, at a point when you're incapable of effectively advocating for yourself.

As my eldest would say, What's the worst thing that could happen?

Then the 31 May edition of The Economist had this to say (bolding mine) (2):

"The sleepy life insurance industry can be marshalled (by private credit) to fund long-term projects and lending, to the benefit of America's economy and its growing number of retirees. They also benefit from lax regulation, including by way of offshore reinsurance arrangement in Bermuda and the Cayman Islands

"(Private-credit giant) Apollo started Athene, its insurance, arm in 2009...Athene now sells more annuities...than any other insurer in America"

The article goes on to discuss more hidden risks, the general consensus of an asset bubble in PC, and the stresses placed on banks.
Unnecessarily in my view, as you lost me entirely at "offshore reinsurance"

Anyhow.

-- sutton

(Were I to wake up King of the US tomorrow, the seventh thing I would do would be to direct the USPS or similar to offer a plain-vanilla annuity for sale at fair prices, guaranteed by the Fed, to John and Jane Q Public.)

(then there's mungo's advocacy of tontines. Again, a nice idea, but requires the future risk of the estates of one's fellow tontine holders not to tie the whole thing up in court, just around the time you need the cash flow.)

1) a fine word, which should never have become obsolete: https://en.wiktionary.org/wiki/relict
2) https://www.economist.com/special-report/2025/05/2... (gated, sorry)

I've looked at annuities quite often. Obviously the draw is getting a consistent check and initially the payment amount looks good. They I start looking at the numbers on a spreadsheet and what inflation does to it 10 and 20 years down the road. Not so good.

You'd likely do better with a conservative 20/80 or 30/70 portfolio. Or buy a 10 or 20 yr treasury. Get less money but it will still be there in 10 or 20 years and then you might be in your 80s and can get an annuity if you need to.

About the only time I could see it possibly working out is if interest rates rose high and the payouts got much higher and then interest/inflation dropped back to normal levels for the rest of the time.

I have a relative in his 80s who has done well with investments and for some reason he buy a number of annuities over the years and is happy with them but I'm not sure why. He doesn't need the money. I think most/all of his RMDs go directly to charities. He also has a nice pension so that coupled with social security and an exceptionally low expenses except for his gambling (a set amount per month).

I was quite close to my grandparents and spent many a weekend night with them and my uncle (at times he lived at home). When his father passed away he moved back home (house was purchased in the 1930s) and continues to live there. I didn't see him much as I moved away and hadn't been in the house for probably 20 years or longer. I took my wife there to see it and it hadn't changed from what I remember as a teenager (I'm retired now). Now he takes care of it in the sense it doesn't have water issues, structural/plumbing issues but the carpet is completely worned out, the kitchen is 40-50 years old, etc. As long as he has his tv to watch sports he is happy. And he enjoys eating out 2 times a day the majority of the time (keeps his weight in control).

Different strokes for different folks but I agree on the annuity.

what inflation does to it 10 and 20 years down the road. Not so good.

TIPS may be the better option. Build your own ladder of TIPS--inflation risk greatly reduced. Not quite an annuity, likely better--and far more secure.

Available annuities are a truly terrible *investment* deal. It is highly unlikely you'll ever get your money back with a positive real return.

However, for someone who is quite old, that isn't really much of an issue...what you want is the tail longevity risk eliminated, not long run investment performance per se. When I've looked into suggestions for people (people write me emails--I don't give advice, merely examples), the sample annuity numbers look bad for the youngsters but not so shabby for the oldsters. You tend to get a very good income from an annuity if you buy it when you're 85-90 years old.

I usually recommend funding retirement from a portfolio as a barbell: put 10-20% aside for when you're quite mature. Say 87 as an example? Take the other 80-90% of the portfolio and run it down to zero linearly so the money runs out at that age, which is not a hard problem. For the rest, there are two approaches. The simplest is on day one, you buy a much-deferred annuity that starts payout out at that same age. Alternatively (and I think better), buy TIPS maturing at that time, and when they mature, put that into a life annuity. This has the side benefit that your estate, rather than the annuity company, gets the funds if you croak before that age. The only disadvantage is that you have something on your to-do list on your 87th birthday. (or whatever age you choose)

The main reasoning between the two-prong approach is that planning withdrawals from a portfolio in such a way to allow for great longevity is not a good wager: by definition, only a very small fraction of the population lives to an unusually old age. If everyone saves against that eventuality, most of that saving is purposeless and the wealth is never enjoyed. Only pooled solutions (annuities or tontines) really make sense for cutting off the rare "tail risk" of living a really long time. Each person participating need only commit a small fraction of their capital to the problem.

(then there's mungo's advocacy of tontines. Again, a nice idea, but requires the future risk of the estates of one's fellow tontine holders not to tie the whole thing up in court, just around the time you need the cash flow.)

I think most modern proposals involve participants putting the funds irrevocably into a trust for the benefit of the others, against which heirs would have no recourse. This involves overhead and a management fee, but it should be pretty low since about the only work is checking periodically which of the participants are still living and sending out quarterly cheques.

It's an interesting question whether it could be done as a corporation instead of a trust. A corporation could be set up to have a class of non-voting non-transferable shares which had a proviso that the share be extinguished on the death of the holder of that class of shares. That class would be non-voting on matters related to the dividend and capital distribution and liquidation rules which would be irrevocable. The advantage is that there is no trustee in the legal sense needed, only a board of directors elected by those who are still living participants. There are several potential advantages of a company. Big reputable trust firms typically charge a prohibitive percentage of assets as a fee, so that problem is avoided. The investment mandate could change with the times, if it became necessary. Corporations handle shareholders in different jurisdictions better than trusts handle beneficiaries in different jurisdictions.

Jim

Available annuities are a truly terrible *investment* deal. It is highly unlikely you'll ever get your money back with a positive real return.

However, for someone who is quite old, that isn't really much of an issue...what you want is the tail longevity risk eliminated, not long run investment performance per se.


Schwab has a fixed-income-annuity-calculator.
I entered male age 80, $100,000 investment, start payouts next month.
N.B. For an 80-year-old male in the US, the life expectancy is 8.3 years

Monthly income:
life: $1,330
life, 10 year certain: $962
life w/cash refund of balance: $1,027

$100,000 / $1,330 = 75 months = 6.25 years
$100,000 / $1,027 = 75 months = 8.1 years

Hmmm, that last might be a not unattractive option if you have heirs.

Why even bother with an annuity at 80 or 85 or so?

As my wife once said, "Wait, if we had $1 million dollars we could just put it into a savings account and withdraw $50,000 a year and it would last 20 years?"

Yup.

Except that ignores interest. If the savings account paid after-tax 3% interest that $1M would last 29.5 years.

Your chances of living to age 100 or 105 is infinitesimal.

So self-annuitize.

Schwab has a fixed-income-annuity-calculator.
I entered male age 80, $100,000 investment, start payouts next month
Monthly income:
life: $1,330...

Indeed, those aren't bad figures. Another site suggests $1033/month, not that much different.

It seems to be not that bad partly because age 80 is getting up there.

But also, things have definitely got a lot better lately. A while back (when bond yields were extremely low, negative in real terms), assuming modest 2% inflation it showed breakeven for a 65 year old starting at age 102. i.e., no real return until then.

Jim

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